SC2200

PAPUA NEW GUINEA
[IN THE SUPREME COURT JUSTICE]

SCA NO. 9 OF 2020

BETWEEN:
L & A CONSTRUCTION LIMITED
Appellant

AND:
L & A ILB (PNG) LIMITED
Respondent

Waigani: Salika CJ, Logan & Berrigan JJ
2022:  25th February & 4th March 

COMPANY LAW – presumption of insolvency – where company presumed to be insolvent as a consequence of failure to comply with statutory demand – where company tenders payment of petitioning creditors debt – where petitioning creditor substituted – presumption of insolvency not affected by substitution of petitioning creditor 

COMPANY LAW – petition to place company into liquidation – where dispute as to whether substituting creditor’s debt exists – whether company may be placed into liquidation on the basis of contested debt of substituting creditor – whether company must first prove solvency – where conflict in overseas authorities – where debt of supporting creditor not contested – where prima facie case for winding up on just and equitable ground – unnecessary to resolve conflict in authorities 

PRACTICE & PROCEDURE – application to stay or dismiss proceedings – where substituting creditor moving on contested debt found to be an abuse of process – where inappropriate for primary judge to determine conflicting evidence summarily – where petition supported by creditor with uncontested debt – where prima facie case for winding up on just and equitable grounds in any event – where conflicting authorities not considered by primary judge – where case inappropriate for summary disposal – appeal allowed

Facts:

Sir Luciano Cragnolini and Ni, Lady Cragnolini were formerly husband and wife. They were also directors of L & A ILB (PNG) Limited (ILB). ILB was a member of an interlinked group of companies which included another entity controlled by Sir Luciano, L & A Construction Limited (L & A). Sir Luciano and Lady Cragnolini’s marriage was dissolved by the Family Court of Australia on 15 July 2017. Consequential proceedings in the National Court by Sir Luciano on the one hand, and the Family Court of Australia by Lady Cragnolini on the other, had been commenced. 

Notwithstanding the dissolution of their marriage both Sir Luciano and Lady Cragnolini remained directors of ILB. The breakdown of the marriage was, however, reflected in the governing of ILB. An impasse developed which caused ILB to be ungoverned and ungovernable. 

On 24 June 2019, Kenmore Limited trading as Atlas Steel PNG – Port Moresby (Kenmore) presented a petition to the National Court seeking orders under the Companies Act 1997 that ILB be placed into liquidation. The basis for this petition was that ILB was unable to pay its debts as they become due as a result of ILB’s failure to comply with a statutory demand. Kenmore also sought further or alternative relief that it was just and equitable for ILB to be put into liquidation. 

Following the presentation of the petition, ILB tendered payment of the debt the subject of the statutory demand. That tender was accepted by Kenmore. Subsequently, and on 30 August 2019, L & A obtained orders from the National Court substituting it as petitioning creditor in the place of Kenmore. Those orders were made on the basis that the National Court was satisfied prima facie that L & A was a creditor of ILB. Relevantly, the audited financial statements of ILB, signed by Sir Luciano and Lady Cragnolini disclosed a debt from ILB to L & A. 

On 11 October 2019, the National Court heard an application by ILB for orders staying or dismissing the winding up proceedings. This application was brought on two bases. First, that the proceedings were frivolous, vexatious or amounted to an abuse of process of the court. Second, that the proceedings ought to be stayed pending the outcome of the proceedings brought by Sir Luciano and Lady Cragnolini in National Court and Family Court of Australia. Lady Cragnolini sought, and was granted, leave to intervene in the winding up proceedings. Lady Cragnolini appeared at the hearing of ILB’s application and made submissions in support.  

On 17 December 2019, the National Court dismissed the winding up proceedings on the basis that the proceedings were frivolous, vexatious or amounted to an abuse of process of the court. In doing so, the learned primary judge accepted the submission advanced by ILB that L & A had not proved that it was a creditor. His Honour also considered that the winding up proceeding was vexatious given that they were brought concurrently with existing proceedings between Sir Luciano and Lady Cragnolini in Australia and Papua New Guinea and the prosecution of the winding up proceedings by L & A amounted to “economic suicide”.  

Held:
1.	Where a debtor company is presumed insolvent by virtue of a failure to comply with a statutory demand, the fact that there has been a substitution of the petitioning creditor as a consequence of the petitioning creditor’s debt being extinguished by tender and acceptance of payment does not affect the presumption of insolvency: Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In liq) (1967) 116 CLR 177 and Deputy Commissioner of Taxation v Sun Heating Pty Ltd [1983] 2 NSWLR 78 referred to. 

2.	Where there is a substantial dispute as to the existence of a substituting creditor’s debt, that dispute is a matter that ought to be determined at trial, not summarily. 

3.	It is unclear whether a court may wind up a company where a substituted petitioning creditor’s debt is disputed or whether it is open for the company to dispute that debt where it has been presumed to be insolvent: ACP Syme Magazines Pty Ltd v TRI Automotive Components Pty Ltd (1997) 74 FCR 372; 23 ACSR 530; 15 ACLC 732; South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465; 14 ACLC 1328 and Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; 22 ACLC 955; [2004] NSWSC 527 referred to. The conflicting authorities in respect of these issues meant that the petition was never one for summary disposal. 

4.	The discretion to dismiss summarily also miscarried because the supporting creditor’s debt was uncontested and because, prima facie, there was reason to wind up the company in any event on the just and equitable grounds, the alternative specified in the petition, as well as the public interest in a company prima facie deemed to be insolvent not further trading. 

Cases Cited:
Papua New Guinea Cases

Cal Export Ltd v Camp Administration Ltd [2009] PGSC 42

Overseas Cases

ACP Syme Magazines Pty Ltd v TRI Automotive Components Pty Ltd (1997) 74 FCR 372; 23 ACSR 530; 15 ACLC 732
Deputy Commissioner of Taxation v Sun Heating Pty Ltd [1983] 2 NSWLR 78
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Loch v John Blackwood Ltd [1924] AC 783
Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In liq) (1967) 116 CLR 177	
South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465; 14 ACLC 1328
Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; 22 ACLC 955; [2004] NSWSC 527

Legislations:

Companies Act 1997
Companies Rules
National Court Rules 1983

Other Text & Materials

McPherson’s Law of Company Liquidation
Mr B H McPherson, Winding Up on the “Just and Equitable Ground” (1964) 27 MLR 282

Counsel:

Mr I Molloy with Mr A Roden-Paru and Mr A Konena, for the Appellant
Mr P Lowing with Mrs P Andrew, for the Respondent

4th March, 2022

1.	BY THE COURT: When this appeal was called on for hearing, the Court received evidence by affidavit that the senior lawyer for the respondent, L & A ILB (PNG) Limited (ILB), Mr Lowing, had, unfortunately, recently been afflicted with the COVID-19 virus as a consequence of the presently prevailing pandemic, and was not well enough to attend court to make oral submissions. The appellant, L & A Construction Limited (L & A), by its senior lawyer, Mr Molloy, made a submission that, given the comprehensive written submissions which had been filed in advance of the hearing date by each party, the appeal might justly be heard and determined on the papers. After a short adjournment so as to enable ILB’s junior lawyer to consult with Mr Lowing and obtain instructions, we were informed that ILB consented to this course. Accordingly, we heard no further oral submissions but rather reserved judgment on the basis that the appeal would be determined on the papers.

2.	On 24 June 2019, Kenmore Limited (Kenmore), which trades as Atlas Steel PNG – Port Moresby, presented a petition in the National Court at Waigani for the winding up of ILB under the Companies Act 1997. The grounds substantively relied upon in the petition, and the related provision in the Companies Act were: 

(a)	the company was unable to pay its debts as they become due in the ordinary course of business – s 291(3)(a); and, further or alternatively,
(b)	it was just and equitable that the company be put into liquidation – s 291(3(d).

3.	As to the first of these grounds, Kenmore had the benefit of the presumption created by s 335 of the Companies Act, which provides: 

S335. MEANING OF “INABILITY TO PAY DEBTS”. 

Unless the contrary is proved, and subject to Section 336, a company is presumed to be unable to pay its debts as they become due in the ordinary course of business where– 
(a)	the company has failed to comply with a statutory demand; or 
(b)	execution issued against the company in respect of a judgment debt has been returned unsatisfied in whole or in part; or 
(c)	a person entitled to a charge over all or substantially all of the property of the company has appointed a receiver under the instrument creating the charge; or 
(d)	a compromise between a company and its creditors has been put to a vote in accordance with Part XV but has not been approved.

4.	Kenmore had served the requisite statutory demand. ILB had not complied with it within the period prescribed. The qualification for which s 336 of the Companies Act provides was not relevant. Thus, on any hearing of the petition, unless the contrary was proved, ILB was, by reason of the presumption created by s 335 of the Companies Act, presumed to be unable to pay its debts, unless the contrary was proved. It is clear on the face of s 335 that the presumption is that the company is unable to pay its debts generally, not just the debt upon which the statutory demand was based.

5.	As it happened, after the presentation of the petition, ILB tendered and Kenmore accepted payment of the debt which had been the subject of the statutory demand. Such an arrangement is by no means uncommon in commerce but it can be fraught both for the company and the creditor concerned. That is because the payment of the debt has no effect whatsoever on the statutory presumption of the debtor company’s inability to pay its debts. Thus, if another creditor is substituted as the petitioning creditor and if the company is subsequently wound up, the creditor which has taken the payment is vulnerable to having to disgorge that payment as a preference on the request of the liquidator of the company.

6.	On 30 August 2019, L & A obtained from the National Court an order under Rule 23 of the Companies Rules that it be substituted for Kenmore as the petitioning creditor. The basis for that order was that, prima facie, the court was satisfied that L & A was a creditor of ILB.

7.	There is a longstanding authority concerning materially indistinguishable provisions in Australian corporation’s law which establishes that the fact that a petitioning creditor has been paid off does not put an end to the petition: Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In liq) (1967) 116 CLR 177, at 194-195 per Menzies J (with whom Barwick CJ, at 179 agreed); see also Deputy Commissioner of Taxation v Sun Heating Pty Ltd [1983] 2 NSWLR 78. Rule 23 of the Companies Rules, in making provision for the substitution of a creditor as petitioning creditor, is predicted on such an understanding of the position under the Companies Act. 

8.	Provision for such substitution recognises that a petition to wind up a company is not a debt recovery proceeding but rather an application that the court should be satisfied that, on one or more of the bases specified in s 291 of the Companies Act, the company concerned should be wound up in accordance with that Act. Where the petition is presented by a creditor, the petition is therefore one which seeks relief on behalf of all creditors that the company be wound up in insolvency.  

9.	The reason why a substitution has no effect on the operation of the presumption for which s 335 of the Companies Act provides is because the circumstances which have given rise to that statutory presumption have already occurred. Contrary to ILB’s submission, the presumption did not cease to operate on the payment by ILB of the debt it owed to Kenmore.

10.	That presumption of inability to pay debts having occurred and the petition, correctly understood, being a proceeding on behalf of all creditors for the winding up of the company in insolvency, any other creditor wishing to assume the conduct of the petition to that end ought, ordinarily, to be permitted by an order for substitution to do so instead of the petition being dismissed. The court’s order of 30 August 2019 substituting L & A as petitioner was entirely orthodox.

11.	Thereafter, if on the hearing of the creditor’s petition, the company does not rebut the presumption that it is unable to pay its debts, a winding up order would ordinarily be made. 

12.	On 11 October 2019, the court heard an application by ILB for orders that:

(a)	pursuant to Order 12, rule 40 of the National Court Rules 1983, and the inherent jurisdiction of the court, the petition proceeding be stayed or generally dismissed as being frivolous, vexatious or an abuse of the process of the court;

(b)	alternatively, pursuant to s 297 of the Companies Act, and the inherent jurisdiction of the court, that proceeding be stayed or restrained permanently or, if temporarily, until the final determination and rulings in proceedings No 7779/2018 in the Family Court of Australia and OS 677/2017 in the National Court. 

13.	On 17 December 2019, the court made an order dismissing the petition. It is that order which is under challenge in the present appeal. 

14.	The court’s reasons for judgment reveal that it made the order dismissing the petition under Order 12, rule 40, of the National Court Rules, rather than pursuant to s 297 of the Companies Act. As to s 297 of the Companies Act, the court, following this court’s decision in Cal Export Ltd v Camp Administration Ltd (2009) PGSC 42, held that s 297 was applicable to court proceedings other than the winding up application itself. That conclusion was, with respect, undoubtedly correct. The purpose of s 297 is to preserve the assets of the company from diminution by collateral litigation, pending the hearing and determination of an application that those assets be distributed according to law upon the winding up of the company.

15.	Grounded as it was in Order 12, rule 40, the dismissal order entailed the exercise of a judicial discretion. L & A accepted, correctly, that it was therefore incumbent upon it to demonstrate an error of principle on the part of the learned primary judge.

16.	It is necessary to outline the circumstances of the hearing on 11 October 2019.

17.	On that day, there were appearances on behalf of L & A and ILB, as well as Nosrida Limited (Nosrida). Nosrida had given notice in September 2019 of an intention to appear as a creditor to support L & A’s petition for the winding up of ILB. 

18.	The evidence before the National Court on 11 October 2019 disclosed an apparently irreconcilable difference between directors and a related impasse in the governance of ILB. This, seemingly, was a manifestation of acrimony and mistrust, associated with the breakdown in 2016 of the marriage between the two directors, Sir Luciano Cragnolini and his by then former wife, Ni, Lady Cragnolini. Also, on 11 October 2019 and without opposition, Lady Cragnolini was given leave to intervene in the petition proceeding as an interested party. She supported ILB’s application.
19.	One manifestation of the marital breakdown was the making of a decree of dissolution of the marriage by the Family Court of Australia on 15 July 2017. Another, in Papua New Guinea, was, so Sir Luciano deposed in an affidavit read in the National Court on 11 October 2019, a lockout by Lady Cragnolini and those acting in her interest of him and those acting in his interest from accessing ILB’s premises. Prima facie, on the evidence before the National Court, there truly was evidence of an impasse between its two directors such that ILB was ungoverned and ungovernable by its directors.

20.	Another feature of the evidence then before the National Court was a controversy as to whether ILB was indebted to L & A. It will be recalled, although not, with respect, by the learned primary judge, that acceptance that, prima facie, there existed such indebtedness, had grounded the substitution of L & A as petitioning creditor in the first place. Annexed to Sir Luciano’s affidavit were audited financial statements of ILB which, prima facie at least, disclosed an indebtedness in the following amounts:

(a)	Year ended 31 December 2016 – K3,134,752.28;
(b)	Year ended 31 December 2017 – K6,602,644.00;
(c)	Year ended 31 December 2018 – K9,817,813.00.

21.	L & A and ILB were each members of an interlinked group of companies.  Sir Luciano’s evidence was that the group of companies had borrowed a large sum from the ANZ Bank for the purpose of property improvement with loan repayments being recognised within the various companies in the group via internal loan account debits and credits.

22.	Also disclosed by Sir Luciano’s affidavit was that the 2016 year accounts had been signed both by him and by Lady Cragnolini in their respective capacities as directors of ILB.

23.	The existence of such indebtedness was, nonetheless, contested in the National Court.

24.	The learned primary judge was pressed, as we were on the appeal by L & A, with a submission that authorities concerning the setting aside of a statutory demand were relevant. It was put on behalf of ILB to the learned primary judge and maintained on appeal that L & A had not definitively proved that it was a creditor and thus that the petition was now an abuse or process, with L & A being vexatious in seeking to prosecute it in the face of existing matrimonial property proceedings. 

25.	His Honour accepted these submissions, going so far as to categorise the prosecution of the petition as a form of “economic suicide”. His Honour also adverted to an agreement made between Sir Luciano and Lady Cragnolini in the context of the Family Court proceedings in Australia. At the time when his Honour heard the dismissal application, there was another proceeding in the National Court (OSS 677 of 2017) to which Lady Cragnolini was respondent wherein Sir Luciano sought order for the enforcement of that agreement. An application for the staying of that proceeding pending the determination of proceedings in the Family Court of Australia had been heard but not by then determined.

26.	Authorities concerning the setting aside of a statutory demand do not offer support for it having been permissible for the primary judge to act on the basis that ILB’s indebtedness to L & A was not “clear”. Satisfaction that there exists a substantial dispute as to a debt the subject of a statutory demand can form a basis upon which that demand may be set aside (s 338(4)(a), Companies Act). However, these authorities are distinguishable in the present circumstances, as they concern a position prior to the engagement by s 335(a) of the Companies Act of the statutory presumption of insolvency. The time for ILB to apply under s 338 of the Companies Act to set aside the statutory demand had long since passed and done so without any such application having been made. Instead, as we have noted, upon non-compliance with that demand, a statutory presumption of corporate insolvency had arisen. That presumption was rebuttable but, on the evidence before the court on 11 October 2019, that question as to whether it had been rebutted was always one requiring a trial, not summary determination.
 
27.	It may also have been a question for trial, not summary determination, having regard to the then conflict of evidence, whether L & A was indeed a creditor. 

28.	We have added an interrogative note to that proposition deliberately.  That is because there is a conflict of authority in Australia as to whether a court may wind up a company on the application of a substituted petitioning creditor where the company is (or is presumed to be) insolvent, even though the debt relied on by the creditor is disputed. In ACP Syme Magazines Pty Ltd v TRI Automotive Components Pty Ltd (1997) 74 FCR 372; 23 ACSR 530; 15 ACLC 732 Spender J concluded that the court could wind up the company in such circumstances. His Honour was of the view that the establishment of the presumption of insolvency was critical, and his Honour was not willing to accede to the argument of the company as to the existence of a debt to the substituted petitioner unless it was able to rebut the presumption of insolvency. However, in an earlier case, South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465; 14 ACLC 1328 (not referred to in ACP Syme Magazines Pty Ltd v TRI Automotive Components Pty Ltd) Ryan J took the contrary view. Later, in Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; 22 ACLC 955; [2004] NSWSC 527, White J of the NSW Supreme Court declined to allow a creditor to be substituted in circumstances where he had simultaneously set aside a statutory demand made by that creditor on the same day it gave notice of an intention to appear on the winding up application.
29.	In the current edition of McPherson’s Law of Company Liquidation, at [3.1040] in the commentary in respect of the substitution of a creditor, the view is expressed by the learned authors, having canvassed the authorities just mentioned that:

While there are sound policy reasons for not permitting an insolvent (or presumed insolvent) company to continue to trade while disputing the debt claimed by the applicant for winding up in accordance with the view of Spender J, the preponderance of judicial opinion seems to be that, as a matter of discretion (rather than power), the court ought to refuse to allow a new creditor to be substituted … where that new creditor's debt is disputed.

30.	These same sound policy reasons are present in Papua New Guinea with respect to the prevention of trading by an insolvent company. However, the position which was evidenced before the court on 11 October 2019 extended beyond just a disputed indebtedness as between ILB and L & A.  Another ground upon which, at trial, ILB might have been wound up in any event was on the just and equitable ground. Further, there was a supporting creditor, Nosrida with an apparently undisputed debt present. It bears repeating that, on the hearing of that petition, Nosrida, as a supporting creditor, could call in aid of why a winding up order ought to be made the presumption of ILB’s corporate insolvency. The learned primary judge’s conclusion that its interests were not prejudiced by the dismissal of the petition was for this reason, and with respect, wrong. Given the presence of that supporting creditor, the utility of ILB’s proving or even alleging that L & A was not a creditor was moot. That, with respect, ought to have emphasised to the primary judge the importance of determining whether ILB was solvent and that this was an issue for trial. Further, on that subject, and at trial, the onus of proving solvency would fall on ILB, given the statutory presumption to the contrary. 

31.	In the circumstances mentioned, it is not presently necessary to resolve the question as to whether it is open to a company subject to a winding up proceeding to dispute the debt allegedly owed to the substituted petitioner without proving solvency, only to recognise that there was some support in authority and legislative policy for the proposition that ILB ought not to be heard to dispute L & A’s debt unless and until it rebutted the presumption of insolvency. That there is a conflict of authority about the ability of the company to dispute the substituted creditor’s debt itself made the petition never one for summary dismissal on the basis that its prosecution was frivolous or vexatious. In fairness to the learned primary judge, we should record that his Honour was not taken to the authorities we have mentioned.

32.	As already noted, the petition did not just rely upon ILB’s inability to pay its debts as a basis for a winding up order. The just and equitable ground was also raised.

33.	The just and equitable ground has a very lengthy provenance in company law: see Mr B H McPherson (as his Honour then was), Winding Up on the “Just and Equitable Ground” (1964) 27 MLR 282. The approach of the courts to the winding up of a company on this ground has been liberalised over time. In the latter half of the 19th century and, with diminishing support, in the first two decades of the 20th century a restrictive approach predominated. Even so, by 1924, in Loch v John Blackwood Ltd [1924] AC 783 at 788-789, the Judicial Committee rejected the notion that the just and equitable ground was to be interpreted ejusdem generis with preceding statutory grounds upon which a winding up order might be made and in some way limited by those grounds. Half a century later, in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 374-375 Lord Wilberforce, with the agreement of Viscount Dilhorne, Lord Pearson and Lord Salmon, emphatically rejected as wrong a tendency His Lordship discerned to create categories or headings under which case must be brought for the just and equitable ground of winding up to apply. As His Lordship stated, “illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances”.

34.	Quite apart from the triable issues of ILB’s solvency and, on one view of the authorities, whether L & A was a creditor, the evidence before the court on 11 October 2019 raised a serious question to be tried as to whether ILB should in any event be wound up on the just and equitable ground, on the basis that it had become ungovernable. Under modern conceptions of this ground, Sir Luciano’s evidence, if accepted, at trial may well have grounded a winding up order on the just and equitable ground. To wind up a company on this basis is not, with respect, to countenance a form of “economic suicide”, only to recognise that, in the circumstances prevailing, it is just and equitable to wind the company up.

35.	In short then, on no view of the evidence before the court on 11 October 2019 was the case one for summary disposal. That evidence did not admit of a conclusion that a prosecution of the petition by L & A was frivolous or vexatious. That there were then subsisting matrimonial property proceedings in Australia did not alter the position that, in Papua New Guinea, there was a company, L & A, which the law presumed to be insolvent which was still, apparently, trading. Truly, the only vexatious proceeding before the court on 11 October 2019 was ILB’s summary dismissal application. 

36.	The appeal must be allowed and the orders made by the court on 17 December 2019 must be set aside. It will then be for the National Court to hear and determine the petition according to law. As to that, we were informed that other petition proceedings have since been instituted against ILB. It may be that events have overtaken the petition which is the subject of the present proceedings. The ramifications of those events in relation to the disposal of the present petition will be a matter for the National Court (assuming that the parties themselves are unable to resolve that subject consensually). 
37.	L & A must pay ILB’s costs both in respect of the appeal and in respect of the summary dismissal application. Having intervened and supported ILB’s summary dismissal application, Lady Cragnolini must also pay L & A’s costs in respect of that application. As she did not contest the appeal, no order for costs ought to be made against her in respect of the appeal. Each of these parties ought also to pay the costs of the supporting creditor, Nosrida, in respect of the summary dismissal application.

Orders

38.    It is ordered that:

1.	The appeal be allowed.
2.	The orders made by the National Court on 17 December 2019 be set aside.
3.	In lieu thereof, it be ordered that
(a)	the respondent’s summary dismissal application be dismissed;
(b)	the respondent and the intervener (Ni, Lady Cragnolini) pay the costs of the petitioner and of the supporting creditor (Nosrida Limited) of and incidental to the summary dismissal application, to be taxed if not agreed.
4.	The respondent pay the appellant’s costs of and incidental to the appeal, to be taxed if not agreed.
____________________________________________________________________
O’Briens: Lawyers for the Appellant
Leahy Lewin Lowing Sullivan Lawyers: Lawyers for the Respondent